This paper analyzes how asset prices in a binary market react to information when traders have heterogeneous prior beliefs. We show that the competitive equilibrium price underreacts to information when there is a bound to the amount of money traders are allowed to invest. Underreaction is more...

The payoff of actions is estimated and the resulting empirical payoff is controlled for in regression analyses to formulate a test of rational expectations in information cascade experiments. We show that the empirical payoff of actions is a function of estimates of choice probabilities and...

The data in Fehr and Tyran (FT, 2001) and Luba Petersen and Abel Winn (PW,2013) show that money illusion plays an important role in nominal price adjustment after a fully anticipated negative monetary shock. Money Illusion affects subjects' expectations, and causes pronounced nominal inertia...

A player i's actions in a game are determined by her beliefs about other players; these depend on the game's real-life context, not only its formal description. Define a game situation as a game together with such beliefs; call the beliefs— and i's resulting expectation—rational if there is...

This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The public signal gives...

We analyze a notion of self-confirming equilibrium with non-neutral ambiguity attitudes that generalizes the traditional concept. We show that the set of equilibria expands as ambiguity aversion increases. The intuition is quite simple: by playing the same strategy in a stationary environment,...

This paper studies how agents with conflicting interests learn to cooperate when the details of cooperation are not common knowledge. It considers a repeated game in which one player has incomplete information about when and how her partner can provide benefits. Initially, monitoring is...

Dynamic matching and bargaining games are models of decentralized markets with trading frictions. A central objective is to investigate how equilibrium outcomes depend on the level of frictions. In particular, does the trading outcome become Walrasian when frictions become small? Existing...

We explore empirically models of aggregate fluctuations in which consumers form anticipations about the future based on noisy sources of information and these anticipations affect output in the short run. Our objective is to separate fluctuations due to changes in fundamentals (news) from those...